Gareth Morgan on Housing Affordability

Gareth Morgan takes aim here at the Productivity Commission, for emphasising land supply as the major determinant of the high cost of housing in New Zealand. He notes that

[t]here are cities in the world with five times Auckland’s population, living in an area no larger than Auckland’s, and with housing prices lower as a percentage of income than in New Zealand.

Gareth, in contrast, points the finger at the Reserve Bank for directing banks to emphasise mortgage lending (for prudential reasons), and the tax code for favouring housing. He says that as a result of this “toxic duo” we have

driven the price of housing from twice the average household income to six times.

He restates his call for a capital tax (not a capital gains tax) to remove a distortion in favour of housing. Now, as I wrote here, I think that a capital tax has some really horrible properties that would swamp any benefits, but this is secondary to why I don’t agree with this analysis of the NZ housing market.

First, explanations don’t have to be either-or. Even if we agree that there are problems in New Zealand capital markets that contribute to house inflation, surely it would be the case that those problems are going to be more acute the lower is the elasticity of supply of land for housing?

Second, one of Gareth’s concerns about the tax advantage given to housing is that it encourages people to buy housing as a path to prosperity, which presumably means that it is based on expected capital gain. Now this either means that house prices have been pushed up by a bubble, which will eventually burst without any change in the tax system, or that the fundamental price of housing is rising, and speculation is just bringing those price increases forward. If that is the case, then removing any favourable tax treatment on the capital gains from home ownership might cause a one-time drop in house prices now, but a faster increase in those prices in the future.

Third, Gareth’s other concern about the favourable tax treatment given to housing–and the one that motivates Gareth’s call for a capital tax–is the familiar fact that the implicit income earned from selling housing services to oneself in owner-occupied housing is not subject to income tax (although the transaction is implicitly subject to GST). This distortion will indeed cause the demand for housing to be higher than it otherwise would have been. But it will not cause the after-tax price of housing services to be higher, so again, it is hard to see how removing the tax distortion would be a solution to the problem the Productivity Commission are addressing.

Finally, if looking to the tax code to explain the change in house prices over time, or differences between countries in the fraction of income devoted to housing, one needs to identify time-series or cross-section differences in the tax code. Pretty much all countries have a tax code that favours owner-occupied housing and always have done. If anything, we have moved the tax code away from favouring housing in recent years with changes in the treatment of investment properties, and a switch from income tax to a higher rate of GST. And we don’t have policies like the mortgage interest rate deduction that are seen in other countries, particularly the U.S.

Ultimately, it just comes down to ECON 100 supply and demand. The New Zealand population has been rising, and land-use policies have been preventing supply from keeping up with demand. Maybe those policies are a good thing, and we should be moving away from urban sprawl to high-density living. But it is hard to counter that the cost of such policies will be a steady increase in the price per square metre of housing.

3 Responses to “Gareth Morgan on Housing Affordability”

“Maybe those policies are a good thing, and we should be moving away from urban sprawl to high-density living. But it is hard to counter that the cost of such policies will be a steady increase in the price per square metre of housing.”

The cost per m2 will only increase if we stick with the paradigm of a 1-2 storey, standalone dwelling surrounded by at least a strip of soil. If the thinking moves (as it would under the right economic conditions) to accept medium to high density including medium rise housing, then the land cost per m2 may well reduce.

If you mean that we remove any restrictions (if they exist) on medium-rise housing, then cost per square metre will be lower than otherwise, and may well offset any increase from population growth. But if no such restrictions exist, then a consequence of population growth combined with no increase in the supply of land for housing will have to be an increase in the cost per square metre, simply becuase it is more costly to build upwards than it is to build outwards.

Sciblogs Archive

Sciblogs is the biggest blog network of scientists in New Zealand, an online forum for discussion of everything from clinical health to climate change. Our Scibloggers are either practising scientists or have been writing on science-related issues for some time. They welcome your feedback!

Sciblogs was created by the Science Media Centre and is independently funded